Transcript: MiB Richard Thaler, Laureate

Given that the Royal Swedish Academy of Sciences Sveriges Riksbank Prize in Economic Sciences went to Richard Thaler yesterday, I thought it might be timely to access the transcript of our MIB interview from 2015. You can also stream it above, or listen on iTunes and Bloomberg.

Here is the the full unedited transcript:

ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

BARRY RITHOLTZ, BLOOMBERG HOST: On today’s podcast, I, once again, have a very special guest. I know you guys are tired of hearing me say that week after week, but you know what? This really is a very special guest, Professor Richard Thaler of the University of Chicago, perhaps best known as the father of behavioral economics, when you look at his body of work, when you look at the impact he’s had, Professor Thaler on the perennial shortlist for Nobel Prize in Economics.

What I think you’ll find so fascinating about him is not just that he’s incredibly intelligent and unbelievably knowledgeable about how human behavior in the world of economics differs so much from traditional economic theory. But you’ll find he’s somewhat mischievous and very amusing and not your typical dry academic and certainly not your typical dry economist.

His background is really the very, very early days of behavioral economics. His early mentors were people like Danny Kahneman and Amos Tversky. He’s worked with Bob Shiller for many, many years, for 25 years. They’ve been co-chairs of an MBER panel on behavioral economics and just anybody who’s been pursuing this field is certainly familiar with his work starting with a lot of anomalies that he’s identified in the world of economics including his book The Winner’s Curse from so long ago. He did a book with Cass Sunstein called Nudge. That’s been very influential.

And currently he’s out promoting his latest book called Misbehaving which really is a mix of his own autobiography which of course paralleled the rise of behavioral economics over the past, let’s call it 40 or 50 years.

And a quick funny story, after we finished the interview, he had to head somewhere else downtown and so I walked with him down to his hotel. We walked down Lexington Avenue. And let me tell you, walking through the streets of Manhattan with Richard Thaler is really quite fascinating because there’s running commentary on everything that’s going on and it’s quite amusing and quite interesting. And he said something that was really — has stayed with me, it was very interesting.

During the interview, you’ll hear him discuss how traditional economic theory works really well through the small insignificant decisions we make over and over again that we get good at. What spaghetti sauce to buy in the supermarket? Where to fill up our cars with gas, things like that, that’s let’s be honest, in the scheme of things are not very consequential. But he also talks about how the big decisions you make in life you don’t get to make that often. You don’t get to be that good at making the decisions that really matter. You don’t have a lot of experience with them.

His examples were you choose what field you go into, where you work, saving for retirement, who and how often you get married, who are you going to marry to and I was — who are you going to married to and how often you end up getting married or remarried. And the big decisions, the ones that really impact your life you do once or twice or maybe a handful of times, so you don’t get a lot of experience, you don’t get a lot of skill at it. It’s something that you hopefully make a right decision and if you don’t, the consequences are really significant.

And so as we’re walking down Lexington Avenue, in New York City, I start talking about that and I jokingly said to him, “Hey you know that thing about how many wives you have and the impact it has on your life is kind of interesting. My secret was to marry my second wife first, just skip the whole first marriage, the whole disastrous first marriage. Go right to the second marriage.” And he laughed and then he said something that has stayed with me since we did the interview. It’s really very, very interesting.

He said, “You can never be happier than your spouse is.” And look we’ve all heard the expression, happy wife, happy life, but stop and think of it in that sort of behavioral terms that the ceiling on your own personal happiness is a function of whatever your spouse’s happiness is. And when you put it into that context, it certainly makes it clear that hey, if you make your significant other happy, it’s going to come back and ultimately raise the ceiling for how happy you yourself can be. But lots of other comments and phrases like that where he is just looking at it slightly a scan, slightly differently than you might consider and it leads to a lot of insights.

So I found him to be absolutely fascinating. I wish I could have kept him there for another hour. Without any further ado, here is my conversation with Professor Richard Thaler.

ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

RITHOLTZ: Once again, I have a fantastic and special guest. His name is Dr. Richard Thaler. He has been called the father of behavioral finance and I’m just going to give a short version of your curriculum vitae. Bachelor’s Degree from Case Western and then a Master’s and Ph.D. from the University of Rochester, Dr. Thaler is the author of over 50 published papers and numerous books most notably The Winner’s Curse, Nudge and Misbehaving. Professor Thaler, welcome to Bloomberg.

RICHARD THALER, PROFESSOR, UNIVERSITY OF CHICAGO: Thanks, Barry, happy to be here.

RITHOLTZ: I’m leaving out half of your CV. We’ll save that for later.

THALER: It’s boring.

RITHOLTZ: Tell us a little bit about your background? How did you find your way to academia?

THALER: I went into academia because I didn’t think I was suitable for anything else. That’s literally true. My father was an actuary and it was a great disappointment to him that I didn’t follow into his footsteps. But I saw him — we grew up in Jersey, worked up Prudential, I saw him taking the train in every day and —

RITHOLTZ: Not for you.

THALER: Not for me and I’m the world’s worst subordinate. So academia seemed like a good choice. And, you know, I was kind of good in math and kind of good in economics so I went into economics.

RITHOLTZ: So you start out as a — was it a graduate student at Stanford or right after being a graduate student?

THALER: Yeah. After being a graduate student and teaching for a couple of years is the Stanford episode.

RITHOLTZ: You had some really influential mentors.

THALER: Yeah. I claimed to have discovered Daniel Kahneman and Amos Tversky.

RITHOLTZ: Right.

THALER: In the same sense in which Columbus discovered America, I mean it was here.

RITHOLTZ: It came too as a surprise to the people who were living here at the time.

THALER: Yeah. So Kahneman and Tversky came to as a surprise to economists.

RITHOLTZ: Right.

THALER: So I claimed to be the first economist to discover them. And I had been interested in weird stuff people do, weird from the perspective of economists. So economists have this creature they study that comes with the Latin term homo economicus. I just like calling them econs.

RITHOLTZ: Economic men.

THALER: Economic men or we should say economic person.

RITHOLTZ: Okay.

THALER: Come on, Barry, we have to be, you know, 21st century.

RITHOLTZ: You work in an academia, so you have to be more politically correct.

THALER: Yeah, right. So economic person, but I call them econs. And econs are as smart as the smartest economist or possibly even as smart as the smartest economist thinks he is.

RITHOLTZ: Which is much smarter and much smarter, let’s be honest.

THALER: Which is — right, which is really, really smart. They have perfect will power, never have to diet because they weigh exactly the right amount, no hangovers, saving for retirement, piece of cake, they calculate how much they need, how much they’re going to earn on their investments, implement. So needless to — oh, one other thing, they’re jerks. So these rational economic men will, you know, I left my cell phone outside the door to charge, if an econ walked by —

RITHOLTZ: He would take it.

THALER: He would take it.

RITHOLTZ: So let me throw a quote of yours to put this succinctly, conventional economics assumes that people are highly rational, in fact super rational and unemotional, they could calculate like a computer and have no self-control problems. So how does this manifest itself, this obvious falsehood about the way humans behave, how does this manifest itself in terms of the way economics progresses?

THALER: Well take the problem of saving for retirement; it’s one of the biggest financial decisions that we have to make in our lifetime. One is how much education to get and what type. Second is who to marry and how often, and the third is saving for retirement. Throw in buying a house and you pretty much have the big ones.

RITHOLTZ: Right.

THALER: So, you know, that’s a piece of cake for econs and it used to be a piece of cake for my father’s generation because there were pensions and you would work at Prudential for your life and then they would give you an annuity and retiring was easy.

RITHOLTZ: You never had to think about it.

THALER: You never had to think about anything. So then, you know, we invent the 401(k) and now people have to figure out whether to join, how much to put in, how to invest it and then how to draw it down which is scary hard a problem.

RITHOLTZ: A whole another set of issues.

THALER: Yeah.

RITHOLTZ: Sure. And so the idea of perfectly rationally person making all the right choices unemotionally with good self-control and perfectly calculated to their needs, that clearly doesn’t exist.

THALER: That clearly doesn’t exist. And notice, if the world was full of people like that, then the 401(k) is unambiguously a big improvement because it’s portable and you can customize it and we all know what’s best for ourselves if we’re econs.

RITHOLTZ: Sure. The DALBAR numbers each year show that the average return over the course of 30 years has been about 3 percent for 401(k) investors.

THALER: Yeah, and they have a great tendency to buy high and sell low. They massively got out of equities starting in about 2006 and flows didn’t turn positive until 2013 during which time the market had doubled.

RITHOLTZ: Why is it so challenging to get economists to actually understand people don’t behave this way in the real world?

THALER: Well let’s just say that one of the things that humans have trouble with is the economic concept of sunk costs.

RITHOLTZ: I was going through your list of mentors. Pretty much your early mentors are all — almost all Nobel Laureates.

THALER: I’ve been lucky.

RITHOLTZ: You know how to pick them.

THALER: Yeah.

RITHOLTZ: You definitely know how to pick them. So before the break, we were discussing sunk cost and I had asked you why is it that economists just won’t recognize some of the reality of the way humans behaved in the real world. And your answer was?

THALER: My answer was, you know, a bit cheeky (as I tend to be) which is that economists teach people they should ignore what they call sunk costs, meaning if that dessert doesn’t taste very good, you shouldn’t eat it just because you paid 20 bucks for it. And economists have trouble following their own advice and they have a lot invested in the rational economic model and weren’t going to give it up without a fight.

RITHOLTZ: Isn’t that the nature of so many ideologies that there’re all this time and effort, there is this endowment effect that it’s yours, you’ve done the work, you’ve done the heavy lifting, very difficult to just, “Oh this is wrong, let me move on and find a new philosophy.”

THALER: Yeah, that’s true. And I often say that I don’t think in 40 years I’ve changed anybody’s mind.

RITHOLTZ: I disagree with that statement. I know you’ve said that, but you’ve actually changed a lot of people’s, if not change their minds, certainly changed their perspectives and enlightened them somewhat.

THALER: Well, but not economists. So I mean the field is growing and there are lots of great people in it, but they’re young. And so my strategy from the beginning was corrupt the youth.

RITHOLTZ: Okay.

THALER: Don’t try to — you know there’s this old line science marches on funeral by funeral.

RITHOLTZ: Physics, one funeral at a time, right.

THALER: Yeah. And there’s no point in trying to convince those guys, but young impressionable graduate students, you know, you can have your way with them.

RITHOLTZ: That’s hilarious. So don’t even bother convincing the old folks. You just go right for the kids?

THALER: Yeah.

RITHOLTZ: It’s a good long-term strategy.

THALER: You know I was playing the long game.

RITHOLTZ: You have good impulse control. I have to work on that. That’s really interesting. So let’s move a little more specifically to the efficient market hypothesis. You once said — I love a lot of your quotes — we don’t want to throw away the efficient-market hypothesis, we just don’t want to believe it’s true. Explain what you mean by that?

THALER: Yeah. So all of behavioral economics and behavioral finance starts with rational models and they give us a benchmark. And it wouldn’t really be possible to do behavioral economics without that rational benchmark. So, you know, the efficient-market hypothesis just really has two components.

One is that you can’t beat the market and the other is that prices are right, that asset prices are equal to their intrinsic value. Now, those are very useful starting points, no hypothesis, right? And the beauty is that they’re testable and so —

RITHOLTZ: Over long periods of time anyway.

THALER: Yeah. Well sometimes like let’s take the price is right.

RITHOLTZ: Okay.

THALER: Here’s an amusing story, there is a closed-end mutual fund which if listeners don’t know, these are mutual funds that you have to buy and sell on exchanges which means that their prices can deviate from the value of the assets they own.

RITHOLTZ: As opposed to traditional mutual funds where you can only buy or sell at the end of the day and it reflects a calculation of everything that’s held within that bucket.

THALER: Exactly. Now the fact that the price can sometimes differ from the value of the assets is already embarrassing, but not as bad as the story I’m going to tell you. There is a small closed-end fund that happens to have the ticker symbol CUBA.

RITHOLTZ: Cuba, yeah.

THALER: Now, needless to say they don’t own any assets in Cuba because A, it’s against the law and B, there aren’t any, right? Nevertheless — and for years it was selling at about a 15 percent discount to its asset value. President Obama made his announcement of his intention to ease relations with Cuba. The Cuba fund went to a 70 percent premium.

RITHOLTZ: The next day after the presidential announcement, it was up almost 50 percent. A week later it was up 70 percent. How inefficient is that?

THALER: Not efficient and, you know, efficient market defenders would say, “Oh look, this is one little tiny example.”

RITHOLTZ: But there are hundreds of those.

THALER: That’s right. And we study these little examples; I call them the fruit flies of finance.

RITHOLTZ: Why can you — why are you so negative on a closed-end fund called Cuba just because it has nothing whatsoever to do with Cuba?

THALER: Yeah, well notice that their holdings are public information.

RITHOLTZ: Yeah.

THALER: And you can buy those stocks on your own for $100. Why would you pay $140?

RITHOLTZ: That’s unbelievable. Well markets are not perfectly efficient. They are kind of sort of eventually will get around to it efficient, maybe.

THALER: Well, maybe. So here’s what I would say, the part that you can’t beat the market is approximately true.

RITHOLTZ: Some people can on rare occasions. Good luck picking them in advance.

THALER: That’s right. And look, I mean what we know is most active managers underperform. And that’s kind of the best evidence in favor of the efficient-market hypothesis.

RITHOLTZ: And that’s before fees, costs, taxes, commissions or whatever.

THALER: Yeah. It depends on how you do it, but they’re certainly not beating the market after fees, but although it’s the best evidence for the efficient-market hypothesis, it’s also the most evidence against because where is most of the money, in active funds. Yeah, Vangaurd has grown a lot.

RITHOLTZ: That is the exception.

THALER: Yeah and still.

RITHOLTZ: And that’s still a third of their $3 trillion is still actively managed.

THALER: Right. So I think it’s approximately right and listeners would be well advised to just say I can’t do it.

RITHOLTZ: It is just inherent in human behavior that we’re going to get booms and busts, markets are going to rally and crash and that’s just the way it’s going to be?

THALER: I think we’re subject to that risk, but I think there are things we could do to mitigate it.

RITHOLTZ: And let’s talk a little bit about Choice Architecture and Nudge which refers obviously to the book you wrote with Cass Sunstein.

THALER: Yes. So the idea of Nudge is that because we’re dealing with humans rather than econs, they sometimes need help. And can we think of ways to help them that don’t force anybody to do anything? So that was the conceit of the book.

RITHOLTZ: In other words, you’re not mandating anything.

THALER: No mandates, no bands, how much can you do with those restrictions?

RITHOLTZ: So you’re just kind of . . . nudging is the right word. You’re just kind of nudging them into the right choice.

THALER: Right.

RITHOLTZ: There’s an interesting little bit of behavioral engineering which is — and I see it here in New York. I come up out of a subway to get to my office because it’s the fastest way to get around town and it’s a double escalator. I mean this thing just goes on forever.

And about half the people stand on the escalator and half the people walk. But sometimes, you get people who don’t understand the social norms and they stand on the left side instead of standing on the right side. I’m in an airport or somewhere in, maybe it was Brussels and I see this escalator and on the right-hand side are two feet on each step, two, two, two. On the left-hand side is alternate, left and right.

And it made it clear, oh this is the walking half and that whole issue you never ran into the person who don’t understand the social etiquette and if you’re standing, if you slow traffic move to the right. It was amazing and it was so simple and very effective.

THALER: Yeah. You know people have lots of misconceptions about nudge. One is that it has to be sneaky. Notice this thing is the opposite of sneaky.

RITHOLTZ: Right in your face.

THALER: Right? Look, my one favorite nudge that I claim has saved my life many times is in London at street corners, there’s a sign at your feed, “Look right,” because the cars are coming from the wrong direction if you’re from Europe or America and so many years of looking for cars coming from your left, all of a sudden, boom. So, you know there’s nothing sneaky about that.

RITHOLTZ: It’s right there.

THALER: Nobody tells you, you have to look at it, but several double decker busses haven’t hit me because of that look right.

RITHOLTZ: You know a couple of years ago I wrote this thing for tourists coming to New York City, and one of the things was there are many one-way streets, but the bicyclists don’t have any obligation (apparently) to follow that. So when you step off the curb, look left AND right to make sure you don’t — and let me tell you how many times I have just missed the bicyclers because I happened to look right. It’s the same — it’s the same exact thing.

THALER: Yeah.

RITHOLTZ: So this really is kind of consistent with the philosophy at the University of Chicago which is really known as a libertarian sort of right leaning philosophical, efficient-market hypothesis place. Are you considered a bit of a heretic there, because you really don’t fit the mold of Chicago economist?

THALER: Yeah. I think heretic would be one of the more polite terms that I’ve been called. You know, we called our philosophy libertarian paternalism.

RITHOLTZ: Libertarian paternalism, I’m writing that down.

THALER: Which the libertarians were mad that we stole their word and everybody hates paternalist. They just think of paternalist as Ralph Nader. But what we’ve — by libertarian, we use it as an adjective and by paternalism, we mean helping people achieve their goals, like not getting run over by a bus. So if we can do that without forcing anybody to do anything, why wouldn’t we?

RITHOLTZ: Known as the father of behavioral economics, I’m about halfway through the book and I found it to be both informative and amusing which is an unusual combination. So let’s talk a little bit about theory induced blindness. I know you are going to be seeing your mentor Daniel Kahneman and you mentioned that’s a quote of his he called theory induced blindness, the refusal to see facts when it disagrees with a theory or ideology. Some people call that cognitive dissonance. Is there any difference between those?

THALER: Yeah, no, I think — I think this is a different concept. So the idea is that if you have a certain lens that you look at things through, then you’re going to see everything to be consistent with your point of view. And so, you know, it’s like people have various views about the economy from the left and from the right and every time there is a bit of news, they’ll find a way of interpreting that piece of news as just confirming what they’ve always thought.

RITHOLTZ: Where I see that every day is the bull-bear debate that takes place in the media and in print and no matter what the data point is the bulls who are long equities are going to explain why this is good for the market and the bears just tried out a counter argument this is proof that we’re all going to die. It’s amazing with the same data points how people just focus on what justifies. Now how much of that is selective perception and how much of that is just — you know we see that which agrees with us and ignores everything else.

THALER: Yeah. The psychologists call this confirmation bias.

RITHOLTZ: Yes.

THALER: So we go out looking for evidence that supports our point of view. I mean —

RITHOLTZ: But theory should show — should be 100 percent much rating at or pretty close to intrinsic value.

THALER: That’s right.

RITHOLTZ: So the fact that you’re finding one that’s 15 percent below one day and 70 percent above, that really shows that hey, that theory is a little bit off.

THALER: Yeah. It’s what we call an anomaly.

RITHOLTZ: Mental accounting, what is mental accounting?

THALER: So mental accounting is the — think of it as the financial accounting of people and economists tell us that money is fungible. If you want to impress people at a cocktail party, use fungible. It just means there’re no labels. But of course, people put labels on stuff. You go to the casino, you can see this. The guy wins some money early in the evening.

RITHOLTZ: Playing with house money.

THALER: Exactly, that’s the expression, playing with the house money, what does that mean? The casino is called the house, so it’s like you’re playing with their money. Well suppose you won $500, you put it in your right pocket. You brought $500 to gamble, that’s in your left pocket. Both of them will buy something pretty nice if you get home.

RITHOLTZ: Right.

THALER: But the one, the house money, easy come, easy go.

RITHOLTZ: It’s entertainment. You’re just putting in a different perception.

THALER: Right. So, you know, that sounds like small potatoes. But during the 1990s technology bubble —

RITHOLTZ: Oh sure, during that boom period.

THALER: — everybody thought they were playing with the house money. And 401(k) investors were just increasing and increasing their equity exposure and at that time, I’ve said one of two things is true, either they’ve understood that equities outperform bonds or they think stock prices only go up. The only thing that will give us an answer is a crash. Fortunately we got a crash and we got an answer.

RITHOLTZ: You know I’ve had this conversation with people that this was early in my career and I remember getting the calls from people who are significantly older than me saying, “Hey, I got a ton of profits. I’m rolling little money out into real estate. I’m picking up that vacation house or I’m trading up to a bigger property,” but they were really the exception.

It was rational, it made sense, I think most people wish they can go back and buy real estate at 1995 prices. That said, you really didn’t see a whole lot of it and anytime people sold at least in the — until 2000 they seemed to have regretted the sell decision.

THALER: Yeah because, you know, everything was upside down during that period. The most value, you know —

RITHOLTZ: Was ignored, did poorly. Profit did poorly that period.

THALER: Yeah, all value investors were getting crushed and you had to just be patient. But meanwhile your neighbors were getting rich. It was hard to do.

RITHOLTZ: So why is it this mental accounting, why do we love bargain so much? You tell one of the anomaly stories about when JC Penny has decided to get rid of the fake prices with the artificial markdowns and just have one price and it was a disaster.

THALER: Yeah, people like deals.

RITHOLTZ: Even if they know it’s nonsense.

THALER: Yeah. And, you know, even rich guys like deals. Plenty of rich guys traveling in December to get their 1K on, you know — to get more miles, so.

RITHOLTZ: In order to hit the next break point and get all these free miles.

THALER: Right and, you know, you go to Costco, the big discount retailer, you see a parking lot full of fancy Mercedes SUVs.

RITHOLTZ: With my wife pointed out, we went to Target a few weekends ago and there is this Rolls-Royce Wraith in the parking lot which is $350,000 at Target. I guess he needed a lot of toys.

THALER: Yeah, yeah. I used to tease my father who was driving around in a fancy BMW looking for the cheapest price for gas. And I said, you know, dad, how much gas he’s using to find the cheapest price, but he had to find the cheapest price.

RITHOLTZ: So you had mentioned casinos earlier. Twain once called gambling a tax on the stupid. Do you agree or disagree with that?

THALER: You know, I think it’s mostly right.

RITHOLTZ: Why do people love gambling?

THALER: They like the thrill. And there are some things like horse racing would be unbelievably boring if you didn’t have some action.

RITHOLTZ: Right.

THALER: And of course the betting is irrational because the rate of return is minus 17 percent per 20 minutes because that’s the take.

RITHOLTZ: Right. It’s funny you say that. So I’m on a cruise with my wife and we’re walking through the casino to get to the other side of the ship and we just walked by one of the tables. And I noticed because I have a bit of — I had a head for math I say to her, “Notice that this pays two to one but you have three chances to lose and that pays three to one and you have four chances to lose,” and it was a roulette table. And I go, “Look at all the odds, the odds are relatively bad relative to the risk.”

And she teaches fashion illustration and design, so she’s a visual person and she says, “I don’t know about that, but they certainly seem to be sweeping up a whole lot more chips than they’re handing out each roll.” And I’m like, oh well, that’s the other way to look at it. And yet people sit at the tables and play for hours and hours.

THALER: So I’ll give you my favorite recent mental accounting story which is in the early days of the financial crisis, the price of gasoline fell by 50 percent. What did people do? Remember, everybody was bell tightening on all fronts except one, people were splurging on premium gas. Because they have a gas budget and they have been paying a 100 bucks a week to fill up the tank and now it’s only 50 and they’re thinking, “Oh well, gas is cheap. All right, I’ll splurge and buy premium every once in a while.”

RITHOLTZ: What of the fact that unless you have an engine designed for premium gas that extra octane just goes out the tail pike?

THALER: You know there’s a lot of money left in the gas budget, so.

RITHOLTZ: So just buy premium gas just for the heck of it.

THALER: You know it’s completely stupid, but what can you do?

RITHOLTZ: So let’s talk a little bit about self-control, that’s another chapter in the book. That’s another one of your favorite topics, people really seem to lack all manner of self-control. How does that manifest itself economically?

THALER: Well, you know, we talked about saving —

RITHOLTZ: Not especially United States, not especially high saving rate.

THALER: We went through a decade where we had negative saving rates and this is the place, the domain where behavioral economists have had their biggest impact and we’ve managed to change the way most 401(k) plans work with two small changes.

RITHOLTZ: What are they?

THALER: One, automatic enrollment.

RITHOLTZ: So you start a new job in a company that has a 401(k) and you’re automatically enrolled in the program.

THALER: Right unless you opt out because you have to fill out a form not to join. And that raised enrollment in the first year from about 50 percent to 85 percent.

RITHOLTZ: A huge, huge difference.

THALER: And a completely trivial change.

RITHOLTZ: And what was the — in the last 30 seconds, what was the other one?

THALER: The other one is what I called save more tomorrow which is get people to agree to increase their saving rates every time they get a raise.

RITHOLTZ: And that has an impact and therefor they’re contributing more.

THALER: Yup.

RITHOLTZ: We’ve been speaking with Professor Richard Thaler of the University of Chicago, author of the book Misbehaving: The History and Making of Behavioral Economics. ~~~

This is our podcast portion where only you folks are lucky enough to go to SoundCloud or Bloomberg.com or iTunes and I have to tell you if you are listening to this you already have found the podcast portion and we just kind of take our ear pieces out and relax and have some fun.

I didn’t get to mention some of your curriculum vitae and I know you said it’s way too long, but you do something with Professor Bob Shiller that’s kind of interesting. You guys are the — you are the co-director of the behavioral economics project at National Bureau of Economic Research. Professor Shiller is your co-director, is that right?

THALER: Yeah. We’ve been doing this for, I think over 25 years.

RITHOLTZ: Really? So here’s what I find fascinating and there are amazing parallels. So Bob Shiller is also a behavioralist. He thinks people make mistakes, markets get crazy, we have bubbles, we have crashes. One of his very best friends is Wharton Siegel, couldn’t be more opposite philosophically than Professor Shiller. He stocks with the long run, we can never — let’s not worry about this, if you’re thinking long-term, you have to be on long equities. Bob is, you know, things look a little pricy, here’s my Shiller cape.

And then I look at you and you’re at University of Chicago, you’re the father of behavioral economics and your golf buddy is Eugene Fama who couldn’t be more opposite in terms of philosophy than you are. How did that relationship develop?

THALER: You know, when I first arrived at the University of Chicago, a reporter asked a couple of distinguished financial economists why they had allowed this to happen.

RITHOLTZ: This heretic to show up.

THALER: Yeah. One, I’ll make you read the book to find out who said he didn’t block it because each generation has to make their own mistakes.

RITHOLTZ: That’s hilarious.

THALER: A very warm welcome to a new colleague. Gene said, oh we hired him because we wanted him — we wanted him nearby so we could keep an eye on him.

THALER: Yeah, exactly, exactly. And, you know, Gene — what Gene says is, and I agree with this, that he and I agree about almost all the facts. We disagree about the interpretations.

RITHOLTZ: Yeah, but you agree that there are bubbles. He sort of has ducked that question, what’s a bubble.

THALER: Yeah, what’s a bubble, right. Look, but what’s his real objection is that we can’t predict when a bubble is going to end which is true.

RITHOLTZ: Bob Shiller has had a pretty good run on calling bubbles.

THALER: No, no, look, Bob is my buddy for 25 years, but he was warning — when did he gave the speech to Alan Greenspan?

RITHOLTZ: ’96 right after Google.

THALER: ’96, four years early.

RITHOLTZ: But he wasn’t saying it’s a bubble, get out, he was saying, “Hey, things have gone,” —

THALER: Well, you know, but —

RITHOLTZ: — kind of what we’ve been hearing in the past few years here.

THALER: Yeah, but like ’98, it was — his hair was on fire and 2000, you know — so — and that —

RITHOLTZ: My selective perception and confirmation bias is that I only saw the 2000 one and they ignored the early one, but I do remember the ’96. He’s the one who planted irrational exuberance and he and Greenspan in there.

THALER: Exactly and then — and then Greenspan gave him that phrase which Bob never used —

RITHOLTZ: In his speech.

THALER: — and he turned it into a best-selling book, which happened to come out in 2000 which was lucky.

RITHOLTZ: Good timing, right.

THALER: Yeah, good timing.

RITHOLTZ: Well, he was pretty dead on with the housing.

THALER: Oh, again, you know…

RITHOLTZ: Really?

THALER: Again, he started warning that house prices are looking pretty scary especially in places like Vegas and Scottsdale but they kept going up for a couple more years.

RITHOLTZ: Right.

THALER: So Gene is right that calling tops and bottoms, there’s nobody who’s good at that. And now, I think it was pretty obvious in both of those cases that there was a bubble going on but, you know, I thought Amazon was ridiculously priced in 1998. And, you know —

RITHOLTZ: It was. Some people would argue it was.

THALER: Yes. And — but I had a guy in my class I was teaching a Ph.D. class in Behavioral Finance. And I said, “Amazon. Who buys this?” And there’s a guy who raises his hand. And he bought it at the IPO.

RITHOLTZ: Oh, come on.

THALER: And he says…

RITHOLTZ: Still on it? Still holding on to it?

THALER: He — well, this was ’98 so it wasn’t that old. And —

RITHOLTZ: So is he still holding on to it today?

THALER: Oh, I don’t know. I don’t know. But — so each week in class, you know, I’m teasing him about this. And each week in class, he’s getting richer.

RITHOLTZ: It just goes up and up.

THALER: And, you know, at the end of the quarter, I gave him an A. I said, “What the hell, he knows more than me,” you know.

RITHOLTZ: People forget that in 1998, the — NASDAQ was up 85 percent and in ’99, it more than doubled. It was up more than a hundred percent. And that’s just — you could throw a dart at any tech stock and you’re making crazy money. Of course, you subsequently ended up with an 80 percent, not too far off from the 29 crash, an 80 percent subsequent debacle starting in March 2000 but Amazon is one of the survivors. It’s still —

THALER: Yeah, yeah.

RITHOLTZ: — still making money. The example I always give people when they say, “Imagine if you bought the IPO of Amazon or Apple,” and my answer is always, “How many of the original IPO holders of Apple do you think are still on Apple, that people buy it and then they can’t — they’re afraid of, ‘Oh my God, I’m going to lose,'” we’ll talk a little bit about prospect theory and about why people seem to hate losses so much more than they like gains in a little while. But how many people who bought Apple even 15 years ago are still on it today?

THALER: Yes. Well, it’s very hard — people have a tendency to get rid of their winners too quickly and to hold on to their losers too long.

RITHOLTZ: And that’s the exact — I started as a trader in this business. It’s the exact opposite. You have to let the winners run.

THALER: You’ve got to let them run and — but — and you’ve got to be willing to admit you made a mistake. And you start to get into loss aversion, lots of evidence shows that losses hurt about twice as much as gains feel good.

RITHOLTZ: So I have to ask why. I have my own pet theory, which is very esoteric. I’m really curious as to why you think — why that is that losses hurt twice as much?

THALER: I think we’re just hard-wired that way. Amos Tversky, one of my psychology mentors, had a joke that there once were species that didn’t exhibit loss aversion and they’re now extinct.

RITHOLTZ: Right.

THALER: So if you’re right mere subsistence it makes really good sense to be loss averse, right? Now, for those of us who if we lose $2,000, we’re not going to fail to make our mortgage payment —

RITHOLTZ: Right.

THALER: — or stop eating, it no longer — you know, the evolutionary cycle is very slow. And so it made sense to be loss averse when losing something meant you starve to death.

RITHOLTZ: Right.

THALER: But now, you know, people do stupid things like buy extended warranties.

RITHOLTZ: Right.

THALER: $27 billion a year industry —

RITHOLTZ: That’s amazing.

THALER: — and most of it is for stuff that is just —

RITHOLTZ: Disposable.

THALER: Yeah

RITHOLTZ: That I forgot what — even the last washing machine, we just bought a washing machine, we moved in September. November, October, we bought washer and a dryer. And they were nice but they weren’t, you know, crazy expensive and they start pitching you the washer. I’m going to throw that if that breaks, you’re going to fix it and if you don’t fix it, I’m throwing it away and I’m buying a new one. I’m not going to — why do I need to spend more money on the possibility of this breaking?

THALER: You know, what people have to think about is they’re making money selling you that policy.

RITHOLTZ: Right.

THALER: And the salesman at the — especially —

RITHOLTZ: Is making money.

THALER: — is making money, that means you’re losing money.

RITHOLTZ: They’re making more money — in college, I worked part-time in — on an electronic store and they would make more money on the extended warranties than they would make on the products.

THALER: So here’s an example of mental accounting. What people should do is say every time somebody offers me an extended warranty, I’m going to take that money and put it into a special savings account.

RITHOLTZ: Right.

THALER: And then anytime anything goes wrong —

RITHOLTZ: It’s your repair funds.

THALER: Yes. I had a — I had a friend at Cornell who had — here was his mental accounting trick. At the beginning of the year, he would set aside money for the United Way. Say five grand he’s going to give.

RITHOLTZ: Right.

THALER: Then, anything bad happens to him, he deducts it from what he’s going to give to the United Way.

RITHOLTZ: Right.

THALER: So it was totally insured.

RITHOLTZ: So he had an insurance policy and at the end, if he had a good year, United Way got five grand.

THALER: Yes.

RITHOLTZ: That’s funny.

THALER: You know, a speeding ticket, no problem, comes out of United Way. You know, and one year, the roof blew off his vacation home in North Carolina. And I told him, look, you — the reason why you weren’t covered is you’re too cheap to give United Way enough money to cover the roof.

RITHOLTZ: Right. That’s unbelievable. So in other words, he didn’t have that Homeowners’ Insurance?

THALER: No, he had insurance but, you know he didn’t have insurance for the deductible.

RITHOLTZ: That’s pretty fascinating.

THALER: That is mental accounting insurance.

RITHOLTZ: So let me keep working my way. So my pet theory on why people hate losses more than they like gains; gains represent a temporary increase in your standard of living. It’s temporary.

THALER: Yes.

RITHOLTZ: And we all know — behaviorists have taught us, hey, you go out and buy a bigger car, or a bigger house, or a nicer television, or whatever, and six months later that just becomes your benchmark, your frame of reference and whatever benefits accrue to that, for the most part, don’t really — most people don’t feel.

I’m in exception with cars and I could tell you, my wife’s car, every time I drive this, we’ve had this for two years, it’s an utter thrill. The car I forced her to get, it’s just this little rocket ship and it’s a delight. Other than getting pulled over for speeding tickets, it’s a delight. And I’m aware as I’m doing this, I’m like, you know, it’s two years and I — the thrill is not yet gone. But I know that it’s about six months for most people.

THALER: Most, for most things and so you’re on to a basic fact of life, which is that we adapt to our surroundings and —

RITHOLTZ: So the upside and the downside.

THALER: Yeah. I mean, look, when you’re a grad student, you don’t feel poor because you’re living with a bunch of other grad students.

RITHOLTZ: Right.

THALER: And, you know, you’ve all got second-hand furniture and —

RITHOLTZ: Macaroni and cheese.

THALER: Yes. And, you know, it’s temporary and — now if we had to go back to living like that —

RITHOLTZ: Oh, terrible.

THALER: Yes. But, you know, we were happy then.

RITHOLTZ: Sure, sure.

THALER: So, you know, that — and so that’s the first basic fact of human nature and then the second is that improvements make us happy but decrements make us miserable.

RITHOLTZ: Right. So here —

THALER: So that’s loss aversion.

RITHOLTZ: So the loss aversion thesis, so not only are the gains temporary but — and this sort of traces back to what you said about people on the edge. When you lose money in that mental accounting that we do, that loss of — the average salary in the United States is about $50,000.

You lose a thousand dollars that means that a week of your life is gone and you have nothing to show for it. You work that week, you got a thousand. You lose it, that’s a significant loss. It’s a permanent loss versus the benefit, the temporary, “Hey, here’s $1,000” you could buy some nice stuff, you could do things, but it’s only temporary. I mean that’s the only I’ve been able to rationalize why we despise the losses so much more than we enjoy the gains.

THALER: You know, I’m not much for evolutionary stories but this one I think is just — we’re hard-wired that way. And maybe in another 50,000 years, we’ll get over it but not anytime soon.

RITHOLTZ: There’s a book I’m almost done reading, I actually put it down to start yours called Last Ape Standing. And it looks at the past 10 million years that there were approximately 30 species of either human-like or near human and how the way they’ve evolved led to some to thrive and some to not make it. And we happen to be the last ape standing. And it’s — a lot of the decision-making that we see today, a lot of these — what you mentioned is hard-wired, well, sometimes the hard-wiring sends you down the wrong path and —

THALER: Right.

RITHOLTZ: — hey, you ain’t around anymore.

THALER: Well, and, you know, we got hard-wired to win that battle with the other sapiens and it came — you know, there were pros and cons. We all have bad backs, you know.

RITHOLTZ: That’ll teach you to walk upright —

THALER: Right.

RITHOLTZ: — a few hundred thousand years to say the least. Let’s talk a little bit about The Winner’s Curse. We kind of skipped over that earlier. What exactly is the winner’s curse?

THALER: The idea of The Winner’s Curse, this was discovered actually by a couple of engineers at Arco.

RITHOLTZ: Arco is…

THALER: Arco.

RITHOLTZ: Oh, the oil company.

THALER: The old oil company.

RITHOLTZ: Atlanta, Richmond Oil Company.

THALER: Yes, exactly. And Richfield.

RITHOLTZ: Richfield, that’s right.

THALER: So what they — here’s what they discovered. They discovered that when they were bidding for oil leases every time they won a lease, there was less oil on the ground than they expected. Not every time but on average. Now, they had pretty good geologists and they couldn’t figure out why they were so unlucky. And then they had the insight. Well, there’s a reason we won the auction.

RITHOLTZ: Paid too much.

THALER: We paid too much. So and the lesson is, the more bidders there are, the more likely it is that if you win the auction, you lost.

RITHOLTZ: That’s really interesting. So if there’s something that you want that you’re bidding at auction for, you should bid a moderate price and either you get lucky and you pay that underpriced or if you get enthusiastic and bid too much, that’s a — that’s losing situation.

THALER: Yes. And live auctions have a way — people get carried away.

RITHOLTZ: They certainly do.

THALER: The only way to rationally participate in an auction is to submit your bid —

RITHOLTZ: And be done with it.

THALER: — and — yeah. And walk away.

RITHOLTZ: So figure out the intrinsic value, apply a reasonable discount, submit that in writing and —

THALER: Yes.

RITHOLTZ: –find out the next day, did I win or not.

THALER: Right. Because if you go in person, you’re doomed.

RITHOLTZ: A friend of mine dragged me to an antique watch auction that took place in uptown in — an hour from where we are. Yes, it’s still uptown from here. And I looked at all these and they come out with the white gloves and they bring this watch is $4,000 and this watch is $90,000 and this watch 500 — it was just insane. That’s a whole different universe of collectibles.

And I watched online the auction go off and there were some things I thought were really interesting and I had the slightest idea of, I would love to pay, you know, still that for 20 percent below but auctions are pretty good at getting people at very least a bid fair value and most of the time to bid above.

THALER: Well —

RITHOLTZ: And there’s the hammer cost on top of it.

THALER: Well, that’s right. But a colleague of mine at Chicago Booth called Devin Pope has studied the auctioneers. It turns out that there are some — there are good and bad auctioneers. Not surprising. But, again, in a world of econs it wouldn’t be true because we would all bid up to our reservation price —

RITHOLTZ: Right.

THALER: — and stop.

RITHOLTZ: So what is it that the good auctioneers are getting people to do that the bad are not?

THALER: Yes, I don’t remember the details —

RITHOLTZ: Other than bidding above or above that reserve price.

THALER: Just — all I — the headline of it is they are different just like there are good baseball pitchers and bad ones; there are good auctioneers and bad ones. And the only reason — that would only be surprising if you’re an economist.

RITHOLTZ: Right. Because there shouldn’t be — there should be only good because so much money (inaudible).

THALER: You know, it should —

RITHOLTZ: There’s a huge incentive to get a good auctioneer if you’re the one running the auctions.

THALER: Right. And, you know, if you’ve ever gone to like a charity auction. If there’s a good auctioneer, they raise a lot of money.

RITHOLTZ: Really?

THALER: Then, you know, they just have their ways of —

RITHOLTZ: People get emotionally excited, they get into it. It’s really enthusiastic.

THALER: Right. Right. And then they’ll — there’s a good trick which is they’ll have two people bidding on like a week in some villa in Italy and one bids 20 grand and the other wins it at 21. And the 20 guy finally says I’ll call it.

RITHOLTZ: I’m done, right.

THALER: And then he says I happen to have a second week. And then he sells the second week to the 20 grand guy.

RITHOLTZ: Oh, that’s amazing.

THALER: And so yes, there’s a lot of skill in that.

RITHOLTZ: So let’s talk a bit about these biases that are so challenging to overcome. Why is it that — are we just creatures of habit? Is it the way we’re wired? Why do people find these inherent issues so challenging to circumvent?

THALER: You know, again, I mean it’s — you know, it’s like asking why do we have bad backs? You know, or why we can’t run as fast as Usain Bolt? We’re built that way.

RITHOLTZ: Right.

THALER: And, you know, in many domains, we recognize it. So, you know, if my wife sends me to the store to pick up some groceries, if there are more than two items, I need a list. You know, I — you know, I understand my memory.

THALER: You know? So we all understand at some level. You know, we set alarm clocks if we have to get up early in the morning. And — so we’re not perfect. And it’s just silly to think that we are perfect. And, you know, as you mentioned earlier in the show, the — there’s nothing wrong with theories that assume everyone’s perfect, the only thing that’s wrong is in believing that those theories are true. So, you know, Greenspan was convinced there couldn’t be a technology bubble because asset prices are equal to their intrinsic value.

RITHOLTZ: They’re rational, of course.

THALER: And, you know, meanwhile, companies are selling for a hundred times sales and they’re computing that because there are no profits and, you know, we’re all looking at this and saying this is completely crazy but then the market goes up another 50 percent and you start to wonder maybe this time is different.

RITHOLTZ: What am I missing?

THALER: Yes, yes.

RITHOLTZ: What is it that I’m not seeing that they are? Although he did do a mea culpa post financial crisis.

THALER: He did do a mea culpa, that’s right.

RITHOLTZ: He believed that reputation would’ve prevented thanks from doing the really dumb things they did. You know, what bank is going to risk a 158-year reputation as Lehman Brothers and Bear Stearns and everybody else did and now, they’re no longer.

THALER: Yes. And I think in a lot of that, a lot of the companies, something I talked about in the book is, you know, economists have this — have a theory they call Agency Theory about principals and agents.

RITHOLTZ: Sure.

THALER: And the idea is usually the principal is the owner so —

RITHOLTZ: Shareholders.

THALER: The shareholders or, you know, Bloomberg, it would be Mr. Bloomberg.

RITHOLTZ: Right.

THALER: Right? So he would be the principal and then, you know, he’s got guys like you working for him and or sharking. That’s the kind of — and the usual idea is that things go wrong because the agent, the employee isn’t doing their job.

RITHOLTZ: Right.

THALER: I think in a lot of cases it’s what I call a dumb principle problem.

RITHOLTZ: Right.

THALER: So, you know, let’s take the banks that were paying mortgage brokers two grand a pop to sell mortgages without any documentation. Now, I’m not blaming the mortgage broker. That’s what he’s getting paid to do.

RITHOLTZ: I’ll take it a step further. Those mortgages had a warranty on them that was often 90 days, three months. So you’re selling the 30-year mortgage, you’ve basically told this mortgage broker, go find me someone who’s going to at least make the first three —

THALER: Right.

RITHOLTZ: — first three out of 360 payments.

THALER: Yes, yes.

RITHOLTZ: Crazy.

THALER: Right. So, you know —

RITHOLTZ: Dumb principle.

THALER: Dumb principle. And, you know, I think in a lot of cases, you know, if we think of the big catastrophes like Barings and Barclays and what we had were CEOs who didn’t understand what the people that were working for them were doing.

RITHOLTZ: That’s dumb principle problem.

THALER: Yes, it’s a dumb principle problem.

RITHOLTZ: That’s fascinating. So we’ve talked about finance, we’ve talked about how irrational people can be in the markets. Let’s talk about fairness where people and fairness games, where people are willing to give up benefit to themselves even if they think something is — because they think something is not fair.

THALER: Yes. A classic experiment is something called the ultimatum game. So let’s say the experimenter gives me $100 and he tells me to make you an offer of some share of the hundred. And the rules are either you take it and you get what I offer you or you say no in which case we both get nothing.

RITHOLTZ: So it’s an all or nothing situation?

THALER: Or it’s the ultimatum, that’s why it’s called the ultimatum game. Now, let’s suppose I offer you $2 out of my hundred. Well —

THALER: Right. So what we find is in that game if you offer less than about 20 percent, you’re likely to get turned down.

RITHOLTZ: That’s amazing. And why is that, because to this person making that decision, it’s free money.

THALER: It’s free money. It’s — but, you know, they say the hell — the hell with you. I mean that’s not fair. And, you know, my friend, Danny Kahneman, and I did a study way back in 1984, ’85, what pisses people off.

RITHOLTZ: Right.

THALER: Well, the more polite term was people think is fair.

RITHOLTZ: Right.

THALER: And we had an example, there’s a blizzard. A hardware store has been selling snow shovels for $15. They raised the price to $20 the morning after a blizzard. Is that fair? Well, people hated it.

THALER: Right. We’re all used to the fact that if you want to buy an airline ticket at Christmas and a hotel room in Aspen, you’re going to pay more —

RITHOLTZ: Of course.

THALER: — than two weeks earlier.

RITHOLTZ: They even call that hey, it’s high season, it’s prime season.

THALER: Right. But you do it in a blizzard, you’re going to make people mad.

RITHOLTZ: Well, you’re gouging.

THALER: You’re gouging.

RITHOLTZ: Taking advantage.

THALER: Think of — the very word gouging, the literal means poke a hole.

RITHOLTZ: Right.

THALER: And that’s the way people feel. So my opinion about Uber is that they should cap the surge and —

RITHOLTZ: So to reduce animist and —

THALER: Right.

RITHOLTZ: — to maintain a reputation.

THALER: Yeah. And it makes sense because they’re fighting a political battle in every city as to whether they can operate.

RITHOLTZ: Right.

THALER: Whether they can go to the airport. They can’t afford to be making people mad.

RITHOLTZ: At least not in the beginning.

THALER: And, you know, there’s — it never makes sense to make people mad. I mean you’re in this for the long run. Most businesses have learned this. So after a hurricane down in Florida, the cheapest place to buy plywood —

RITHOLTZ: Walmart.

THALER: — is Walmart in Florida.

RITHOLTZ: They’re notorious for anticipating weather and shipping extra whatever it is, extra plywood, whatever is needed. And it generates a lot of goodwill.

THALER: A lot of goodwill. Now, there will also be a guy in Atlanta who will load up his truck with plywood sell it off the back of the truck for market price. Both Walmart and that guy are being rational.

RITHOLTZ: Walmart’s playing the long game and that guy is just doing a one-off —

THALER: Right.

RITHOLTZ: — hey, it’s not my reputation, not my business in Florida. I’m selling this plywood and going back to Atlanta.

THALER: Right. So, you know, we’ve all had the experience in New York, it’s raining —

RITHOLTZ: Cabs disappear.

THALER: — cabs disappear, some guy in a black car pulls up —

RITHOLTZ: Twenty bucks.

THALER: — 20 bucks. Right? And, you know, you pay.

RITHOLTZ: Unless you want to get wet.

THALER: Unless you want to get wet. But if a cab driver pulled up and let’s say, it’s a $6 fare normally. And he says, it’s raining, it’ll be 20 bucks. You’re going to write down his tag number.

RITHOLTZ: You’re going to be very, very unhappy but you put up with this from Uber because it’s a different choice. It’s a third option.

THALER: It’s a third option but I think they could — they could do better.

RITHOLTZ: So let me ask you some of my favorite questions that I ask all of my guests. These are some regular ones. Let’s start with an easy one. What are some of your favorite books and they can but don’t have to be economics books? What books do you really — have you really enjoyed?

THALER: Maybe my favorite book of all time is Catch-22.

RITHOLTZ: I love Joseph Heller. That book was just —

THALER: It’s a genius book.

RITHOLTZ: I read that in college and just — that’s some catch that Catch-22.

RITHOLTZ: I wonder if the estate has not — is the reason why. It was published pre-Kindle so there’s no obligation for it to show up that way.

THALER: Right, right. Right.

RITHOLTZ: If you like Heller, were you Vonnegut fan at all?

THALER: Yes, I love Vonnegut.

RITHOLTZ: So fantastic. Catch — so the two big ones Slaughterhouse Five always comes up every time Catch-22 comes up but few of his other ones, which was Cat’s Cradle is just so good.

THALER: Yes. You know, there’s a book that many people know that I read because I was there about — called Galapagos.

RITHOLTZ: Galapagos.

THALER: I think that’s the title, maybe it’s not the title but it’s a book that takes place there. And —

RITHOLTZ: A Vonnegut book?

THALER: A Vonnegut book.

RITHOLTZ: I’ll have to check.

THALER: Yes.

RITHOLTZ: The Galapagos book that’s in the back of my head, Douglas Adams who wrote The Hitchhiker’s Guide to the Galaxy.

THALER: Right.

RITHOLTZ: He did a book called Last Chance to See and he talked about — by the way, you want to go see — this is not going to be here for another hundred years, if you want to go see this, go take a look. If you want to go see that, go take a look.

THALER: So here’s another book and this is a book I went back and re-read while I was writing my book. And it’s Richard Feynman’s Surely You Must Be Joking, Mr. Feynman.

RITHOLTZ: Mr. Feynman, yes. It’s on audio now also. You could get the versions of him narrating some of his speeches and some of his stuff.

THALER: Oh, really?

RITHOLTZ: Yes, his stuff is wonderful.

THALER: So in some ways, writing this book was my final act of misbehaving. You know, the title technically refers to the fact that people misbehave according to economists.

RITHOLTZ: Right.

THALER: But a second meaning is that by pointing that out during my career, I was misbehaving.

RITHOLTZ: Well, you didn’t conform to what —

THALER: Right.

RITHOLTZ: — norms they were expecting you to conform to.

THALER: And then the third act was writing the book the way I did because my publisher assured me that there’s no market for a book like this.

RITHOLTZ: Right. They’re very bad at predicting these sorts of things.

THALER: Yes, yes.

RITHOLTZ: But that’s true in television, and film, and —

THALER: Right.

RITHOLTZ: You know, that’s — the famous William Goldman line, “Nobody knows anything,” talking about Hollywood that they would make these — if it was up to them, they would just make sequels of what was originally successful but you got to at least try something to see what’s going to be successful.

THALER: Right. So Feynman’s book, you know, you’ve read it. It’s a bunch of stories and some of them are very funny.

RITHOLTZ: He’s a funny guy.

THALER: But there’s no Physics. So the book I wanted to write is as it would be if Feynman had tried to explain Physics in that book.

RITHOLTZ: Uh-huh. Got it, that makes perfect sense.

THALER: I don’t know whether you think I achieved that but that was what I was trying to do.

RITHOLTZ: So let me ask you. My next question is what sort of advice would you give to a young Economics student or a millennial either just entering grad school or just starting their career today?

THALER: Find your own problem to work on.

RITHOLTZ: Your own problem?

THALER: Yes, don’t be your advisor’s research assistant. And it may cost you a year because the easy thing to do is do a variation on your advisor’s life work. And —

RITHOLTZ: That doesn’t put you in good standing for the rest of your career.

THALER: Well, you know, I think — you know, the — my book starts out with the story about Daniel Kahneman having an interviewee with Roger Lowenstein, the guy who wrote When Genius Failed.

RITHOLTZ: Which I loved.

THALER: Another great book.

RITHOLTZ: Another fabulous book, absolutely

THALER: Right. And —

RITHOLTZ: I just had lunch with him not too long. He’s so insightful, Roger.

THALER: Yes, he’s a great guy. So the story is that Roger was writing a piece about me for the New York Times Magazine.

RITHOLTZ: You were in the room while Danny was actually having the conversation.

THALER: Right. So Danny said “Do you want to stay for this?” And I said, sure. And then he starts explaining to Roger Thaler’s best quality, what really makes him special is that he’s lazy. And I’m waving my hands in the air and shaking my head and saying, you know, come on. I admit to being lazy but it isn’t my best quality? And Danny still sticks to that story.

RITHOLTZ: I love that. That’s a great story. Professor Thaler, thank you so much for being so generous with your time. We’re going to wrap right here. I know you have a place to go to from here and I will see you on the radio tomorrow.

For those of you who are listening, we’ve been having a conversation with Professor Richard Thaler of the University of Chicago. Be sure and check out some of our other podcasts. You can look an inch up or inch down and end up checking them out. Check out Professor Thaler’s Twitter handle @r_thaler at Twitter. I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.